* I wrote an essay for the Opinion section of The Information last week, "Why YouTube Sees Hollywood’s Future in the Creator Economy". It dove into the symbolism and significance of the departure of YouTube Global Head of Original Content Susanne Daniels, which came six weeks after the release of MrBeast's real-life version of Netflix’s Squid Game.
I will be sending the essay to everyone this week.
* Also, I am going to change things up on Friday.
There is so much change happening now, it feels remiss to stay mostly focused on legacy media and streaming. Even if we do not fully understand these new marketplaces, some key moving pieces are emerging.
That makes it easier to start to pick up valuable signals from the noise about where post-”streaming wars'” convergence in media is headed.
I am going to use Friday essays to focus more on those.
A Short Essay on Netflix's Moment of Hubris
Netflix's stock price dropped as much as -26% since its earnings call last Thursday afternoon. As of last night it was down -23%.
There is a lot of speculation as to why, though most seem to hone in on investors reacting negatively to the combination of a missed target and the concession in the Q4 2021 letter to shareholders "added competition may be affecting our marginal growth some".
I wonder whether it was also in reaction to the answers of Co-CEOs Reed Hastings and Ted Sarandos in the earnings call to this question from Nidhi Gupta of Fidelity Investments:
As usual, I'd like to start with net adds during the quarter, which came in a little bit later than you expected. Just help us understand the underperformance there.
Reed Hastings -- Co-Chief Executive Officer
Nidhi, 8.3 million versus 8.5 million, I mean --
Ted Sarandos -- Co-Chief Executive Officer and Chief Content Officer
Two hundred and twenty-two million.
The question is, is this hubris? Are the Co-CEOs of Netflix being too dismissive of a miss?
I think if you're Netflix the answer is no, as CFO Spencer Neumann explained:
So it was just a bit shy, about 0.1% on roughly 222 million paying members. And overall, we're quite pleased with how our titles performed. We had big viewing. We started the quarter with "Squid Game" becoming a global phenomenon, and we ended the quarter in December with big TV series like the finale of "La Casa de Papel," a big returning show in "The Witcher", our two biggest movie releases of all time.
So overall, the business was healthy. Retention was strong. Churn was down. Viewing was up.
But on the margin, we just -- we didn't grow acquisition quite as fast as we would have liked to see, and on our large subscriber base, a small change in acquisition can have a pretty big flow-through in paid net adds. And again, our acquisition was growing, just not growing quite as fast as we were perhaps hoping or forecasting.
But, if you are investor who increasingly wonders whether the streaming business model is a good business, the answer is yes. A miss is a miss.
It seems like a significant miss given how legacy media stocks also betting on streaming were punished less than Netflix over the last five days: Discovery 📉 -10%, Disney 📉 -10%, ViacomCBS 📉 -13%, AMC Networks 📉 -12.5%, and Lionsgate 📉 -9% (CuriosityStream was the lone exception at 📉 -25%).
The stocks least impacted? Those invested least in streaming: CMCSA 📉-3%, Roku 📉-8.5%, Apple 📉-5%, and AT&T 📈+0.23% (Amazon was the lone exception of this group at 📉-11%).
In this light, Hastings' and Sarandos' answer reads like tone-deaf hubris: it focuses on an objective accomplishment - 220MM subscribers - but without framing it in the larger context of growing investor questions about streaming.
In particular, the most reasonable question a bearish investor may ask is: if Netflix is succeeding then why are historically weaker services like Peacock and Paramount+ expected to report growth at Netflix's expense?
There is also the story Nielsen's The Gauge implied - Netflix had higher engagement but lost share to gaming and linear in the U.S.- which Netflix's letter to shareholders confirmed (and I predicted last Monday). Notably, this quarter Netflix did not include the graphic of The Gauge in its letter to shareholders.
But, above all else, Netflix is increasingly talking up gaming, as COO Greg Peters did in answering a question about Microsoft's acquisition of Activision and Netflix's own plans in the space:
I mean it was exciting to see the activity in the space. And I think to some degree, it's an endorsement of the core thesis that we have around subscription being a great model to connect consumers around the world with games and game experiences. And we're open to licensing, accessing large game IP that people will recognize. And I think you'll see some of that happen over the year to come.
But we also see -- back to Ted's like building out a whole cloth and the ability to sort of take the franchises or the big titles, let's call it, that we are excited about and actually develop interactive experiences that are connected to those. We see a huge, long-term multiyear opportunity in that, too. So we'll -- we're very open. We're going to be experimental and try a bunch of things.
The "huge, long-term multiyear" vision is to "take the franchises or the big titles... that we are excited about and actually develop interactive experiences that are connected to those." That vision implies streaming will be a necessary condition of its longer vision, but will not be the core business.
A reasonable interpretation is there is not much growth left, despite content spend going up 25% year over year to $17B. In other words, their best case to investors seems to be, "we're going to spend $17B to build out more big titles and franchises around which we will develop interactive experiences, but we can't tell you yet what that will look like or how it will all work together".
To date, it has been a mistake to bet against Netflix. I believe that remains true.
That said, I think they made it too easy to bet against them in this last earnings call.
Are Investors Cooling on Warner Bros. Discovery?
The Wall Street Journal's Holman Jenkins had a smart take on AT&T's planned spin-off of WarnerMedia into Discovery. It builds upon a cool, if not cooling, Wall Street response to the merger (something I predicted for Members in my Predictions for 2022), and is tied to Netflix's stock decline.
Here is a quick response and critique for PARQOR Members, only.
The core of Jenkins' argument was that AT&T should not spin off WarnerMedia:
AT&T’s telecom business and Warner’s entertainment business are good businesses, with good futures. They may have only one strategic overlap, but that overlap is genuinely useful to both, to lock in customers and reduce costly churn. The original deal may have been overpriced. Its strategic genius may have been overstated. But AT&T shareholders won’t be freeing themselves from their decision to invest in the Warner assets, they’ll be rolling them into an inferior Discovery opportunity. If either company’s prospects were really improved by this deal, the stock market would have noticed by now.
Let's start with what I think Jenkins gets wrong: he argues that after AT&T spins off WarnerMedia, "gone will be any chance of building deep and lasting value from a relationship between AT&T and its soon-to-be-former streaming property."
But, he notably does not mention Verizon here, which according to its CEO Hans Vestberg has found stickiness and retention in offering multiple third-party services across streaming, music, and gaming. The mobile subscription model is growing mobile accounts and minimizing churn, and Verizon has proven that a model relying on a portfolio of third parties may offer more lasting value to consumers than the variable costs (which were to the tune of hundreds of millions for AT&T) of owning one of them.
What makes Jenkins' argument interesting is how it frames Netflix's stock "wipeout" as a "harbinger":
a 20% drop in the streamer’s share price, worth $44 billion, because investors questioned whether subscriber growth can justify the billions Netflix keeps investing in new content.
He envisions that AT&T could have taken a smarter approach than Netflix's model, "brand[ed] itself permanently with HBO Max while also letting HBO Max remain a premium collection of streaming content" instead of trying to please "fickle streaming customers." He adds, "Much of the Warner Studio system could then be devoted to milking Netflix and others by selling them shows rather than competing with them."
He's effectively describing Lionsgate's model, and Lionsgate is pursuing a corporate spinoff of its streaming service Starz. So it's a nice idea, but no one who is actually in the streaming marketplace seems to agree with it.
I think Jenkins nails it with his diagnosis of the "unmerger" being driven by corporate governance considerations, first:
it’s hard also to escape a suspicion that AT&T management recognized that new investors would want new managers for new opportunities, not a bunch of telecom veterans. In short, AT&T is proceeding with its chaotic unmerger so AT&T can go back to being a company that the market will let AT&T’s current leaders keep running.
But, I also think Jenkins discounts that the WarnerMedia acquisition (and ad acquisitions through Xaxis) was originally intended to transform the perception of AT&T from a dividend stock to a growth stock.
They failed to do so. Asking investors to imagine AT&T as a growth stock right in this market is a big ask.
He is right in that investors' perception and understanding of the streaming business has grown bearish during the pandemic. And, if it has, should AT&T still go through with the merger?
The cost to AT&T in that instance would be a $1.77B breakup fee to Discovery (if regulators kill the deal, there will not be a breakup fee), which is effectively burning cash on top of the ashes of its destruction of WarnerMedia's (and DirecTV's) value.
Odds are the deal will still go through. However, Jenkins seems to be picking up on skepticism from investors that may "shock and awe" CEO David Zaslav's plans for $20B in content spend. I also wonder if they prefer the growth story that CEO Jason Kilar has built, to date.
I'm not sold anyone wants to walk away from this deal or make changes to the strategy. But the silence and coolness of investors to the merger, with a tanking stock market in the background, seem like unpredictable headwinds for the proposed merger.
Must-Read Monday AM Articles
* Recent Netflix job listings suggest "much bigger ambitions" in video gaming
* The Hollywood Reporter has a good breakdown of the math and business rationale behind Netflix's price hike in the U.S. and Canada.
* Lucas Shaw of Bloomberg had a good summary of Netflix's evolving strategy in sports
* Discovery isn’t entirely certain what it will have to discuss at Upfronts.
Emerging "Metaverse"-type convergence strategies
* A good, short discussion from Washington Post Gaming on Twitch's inconsistencies with DMCA bans after Twitch livestreaming stars received takedown notices for broadcasting television shows to their millions-strong fanbases on Twitch.
* The Financial Times had a good piece on Sony, which "has figured out the right focus on entertainment, where they have a strong position in both music and video games — and are attractive in TV and movies because they can sell content to the highest bidder."
* Three places where venture capital is flowing into the sports betting industry.
Aggregator 2.0
* Bloomberg's Jason Schreier wrote about how Activision CEO Bobby Kotick tried to manage post-Microsoft acquisition optics
* This VentureBeat piece argues the merger is Metaverse-oriented (I think there's some truth to that, though at a smaller scale)
* Sometime in recent weeks YouTube added an option for Premium and Music Premium subscribers to pay on an annual basis (it had been monthly, to date).
* T-Mobile has reassured its subscribers that its long running “Netflix On Us” promotion is still in place even after the streaming service’s recent price hike.
Sports & Streaming
* NBCU is reported to have "retooled its estimates" after pushback from marketing partners disappointed with the ratings of the Tokyo summer Olympics. ($ - paywalled)
* DraftKings, FanDuel, Rush Street Interactive and Caesars Sportsbook took in $150 million in wagers from over 650,000 player accounts since the online sports betting operations were allowed to commence operations in New York on Jan. 8
* Senator Joe Addabbo discussed helping New York launch online sports gambling and predicted where it's all headed
* "A combination of factors" led to certain Australian Open matches being unavailable on ESPN+ last week when they should have been.
* A good profile from Bloomberg's Gerry Smith on rising sports media star Pat McAfee, who just signed a $120MM deal with FanDuel.
* Wynn Resorts is looking to unload its online sports-betting business at a steep discount.
Creative Talent & Transparency in Streaming
* Actor Bradley Cooper told The Hollywood Reporter's Kim Masters that the upfront model emerging in streaming gives him "trepidation".
* Insiders say new Hulu president Joe Earley has the 'superpower' to tackle complex corporate politics at Disney ($ - paywalled)
* Jessica Toonkel at The Information wrote a good piece on streamers navigating the challenges of personalized content that doesn't surface for the talent starring it.
* A leading influencer complains to his followers that TikTok is dramatically under-paying creators
Original Content & “Genre Wars”
* HBO Max's Peacemaker, a series spun out of the Suicide Squad movie, currently boasts a 94% on Rotten Tomatoes, just enough to allow it to lead the entire pack of DCEU films
* LucasFilm has rethought its slate of non-Star Wars titles
Comcast’s & ViacomCBS’s Struggles in Streaming
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AVOD & Connected TV Marketplace
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Other
* A good, short interview with TCG's Crypto Investor Jarrod Dicker
* A new post from Netflix's Technology Blog on how Experimentation is a major focus of Data Science across Netflix.
* AdAge breaks down what the surprise departure of CMO Nick Tran from TikTok signals for the company's road ahead.